Succeed by Losing: Netflix Has "No Real Competition" (That's Easy When You Lose $2.5 Billion)

Supposedly Netflix had another good quarter. Why? It topped analysts' estimates. "Reported" profits doubled to $130 million. Actual losses will hit $2.5 billion. Who can compete with that?

Investing columnist Philip van Doorn has an interesting opinion article on MarketWatch: Netflix Shows it has No Real Competitors.

Netflix Inc. NFLX had another good quarter, as subscriber growth accelerated and topped analysts’ estimates. A slew of analysts raised their price targets for the stock.

In the past 12 months, Netflix has achieved sales growth that puts it near the top of the FAANG group, which also includes Facebook Inc. FB, Amazon.com Inc. AMZN, Apple Inc. AAPL, and Google parent Alphabet Inc. GOOG.

Shares of Netflix are trading for 92.7 times the consensus 2018 earnings-per-share estimate. That is a lofty valuation, exceeded among the FAANG group only by Amazon. By traditional measures, that level of valuation is outrageous. But as we have seen with Amazon, investors will reward a company if they are convinced that management’s long-term investment in growth is worthwhile.

Many of the more traditional content distributors and creators have been putting up decent, or better, sales numbers, but the industry is in the midst of a dramatic realignment, and Netflix appears to be on the leading edge.

Lofty Valuation

Doorn says trading at 92 times earnings is a lofty valuation. Indeed it is, since Netflix has no real earnings.

Deep Pockets

How can a company keep bleeding massive amounts of money? Bloomberg notes "deep pockets".

To buy programming, you need cash, and Netflix is still burning through it at a fast pace, even though the company promised to begin generating substantial profit after completing its global rollout.

Netflix forecasts negative cash flow of as much as $2.5 billion in 2017, with more losses coming in the years ahead, and has raised even more than that over the past year with a $1 billion U.S. bond sale last October, a $1.4 billion euro-bond sale in April and a deal in July for a $500 million credit line.

With cash and short-term investments at $2.16 billion last quarter, the highest since the end of 2015, the company looks set for the time being.

Negative Cash Flow

Streaming Losses

How to Succeed

The goal is to lose so much much money that no one can compete. This model works until funding dries up. Netflix has over $2 billion in "cash" (debt actually, that it can spend as cash). It will need to raise another $2.5 billion or so next year.

If and when Netflix ever makes a dime, it's actual P/E will be in the hundreds or thousands, not 97 as Doorn stated. It has no P/E now because it's losing billions of dollars a year.

This constitutes success.

If consumers or investors turn on the company, it will be out of business quickly. Meanwhile, insiders will have cashed out countless billions of dollars in stock options.

The setup reminds me of Countrywide Financial. CEO Angelo Mozilo cashed out a billion dollars in stock options as he ran the company into the ground.

Mike "Mish" Shedlock

Comments (21)
No. 1-21
pyrrhus
pyrrhus

The current investment scene makes the 1929 climate look like the height of conservatism....There are parallels, though. RCA in 1929 was losing money, but traded at more than $300/share.When RCA finally made money, years later, it traded at a small fraction of that price.

Medex_Man
Medex_Man

The problems with cable TV include (1) they promised consumers would pay a monthly fee INSTEAD of watching ads.... then they put ads on every channel AND more ads per show AND product placements inside the shows; (2) there were 900 channels and nothing on. Thousands of repeats. A dozen "news" channels that all parrot the same misinformation. And countless "independent" movies, mostly extremist hippie cr-p.

Medex_Man
Medex_Man

Netflix wants to raise prices now (just like a cable company)

Medex_Man
Medex_Man

Netflix is funding lots of "original" movies advocating gay rights and black characters -- while IGNORING mainstream programming. Same political nonsense that turned consumers against cable channels

Medex_Man
Medex_Man

Higher prices to fund outlier political positions -- while ignoring mainstream programming? This movie already didn't work